Question

Masterson, Inc., has 7 million shares of common stock outstanding. The current share price is $79, and the book value per share is $10. The company also has two bond issues outstanding. The first bond issue has a face value of $120 million, has a coupon rate of 4 percent, and sells for 92 percent of par. The second issue has a face value of $105 million, has a coupon rate of 3 percent, and sells for 104 percent of par. The first issue matures in 22 years, the second in 7 years. Both bonds make semiannual coupon payments.

Required:
a. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)
b. What are the company’s capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)
c. Which are more relevant, the book or market value weights?

Answer 1

Answer and Explanation:

The computation is shown below;

a. On book value basis

Particulars Book value Weight

Debt $70 0.2373

(7 × $10)

common stock $225 0.7627

($120 + $105)

Total $295

b. On market value basis

Particulars Market value Weight

Debt $553 0.7158

(7 × $79)

common stock $219.60 0.2842

(120 × 0.92 + 105 × 1.04)

Total $772.60

c. The market value weight is more relevant